The Ministry of Corporate Affairs (MCA) has made significant regulatory adjustments for corporations engaging in mergers and acquisitions, particularly those involving international organizations. According to the new regulations, any merger between a foreign holding company formed outside India and its wholly-owned subsidiary (WOS) incorporated in India would now require prior clearance from the Reserve Bank of India (RBI).

Why did the Ministry of Corporate Affairs implement these rules?

The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, have been amended to ensure that both the foreign transferor and the Indian transferee companies comply with the new standards.

These revisions are intended to improve compliance with India's foreign exchange rules and provide a more efficient regulatory environment for such mergers.

What are the new merger rules?

Under the revised regulations, foreign holding entities must acquire RBI approval for mergers with Indian enterprises.

In addition to getting RBI permission, the transferee Indian business must follow the rules of Section 233 of the Companies Act of 2013, which governs mergers and amalgamations. This includes the obligation for the Indian business to submit an application to the central government as part of the merger procedure.

The amended laws emphasize that merger applications must be submitted under Section 233 of the Companies Act, underscoring the need for legal and regulatory scrutiny in cross-border mergers.

Mergers of Indian and foreign organizations

Sandeep Jhunjhunwala, a partner at Nangia Andersen LLP, spoke with PTI about the moves, adding that the current practice of "reverse flipping," in which Indian subsidiaries combine with overseas holding corporations, has been common among numerous entrepreneurs.

He believes the new restrictions come at a time when India's IPO market is growing, providing investors with a viable exit path. Under the new sub-rule, both the foreign transferor holding company and its wholly-owned Indian subsidiary must seek prior RBI permission for mergers or amalgamations.

Furthermore, the Indian transferee company must file an application with the central government under the existing provisions of Section 233 of the Companies Act and Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, to seek approval for such inbound mergers.